Financial Inclusion in Bangladesh: Initiatives, Achievements and the Way Forward amidst the COVID-19 Pandemic

Utpal K De and Simi Mehta

Financial Inclusion has been recently acknowledged as a key enabler for reducing poverty and improving prosperity. However, more than 50% adults of the poorest households are still unbanked globally. The Bangladesh government continues to make progress on its financial inclusion goals through the implementation of initiatives designed to reach the financially excluded, particularly the poor. Financially included adults made up 47% of the population in 2018, a 10 percentage-point increase from 2017. According to IMF (2016), 45% people of Bangladesh are out of formal financial services. High interest rate, vast rural population and low literacy rate are among the prominent factors that restrained the government and the World Bank joint initiatives to reach universal financial access.

Despite a lot of loud discussions regarding financial inclusion, a large number of people in Bangladesh are far from being granted access to basic financial services, making financial inclusion development an essential project in the country. Women, marginal farmers and informal sector enterprises are affected the most in this case.

The COVID-19 pandemic has caused an unprecedented human and health crisis. The measures necessary to contain the virus have triggered an economic downturn. At this point, there is great uncertainty about its severity and length. The latest Global Financial Stability Report shows that the financial system has already felt a dramatic impact, and a further intensification of the crisis could affect global financial stability

Financial inclusions in Bangladesh- its challenges, initiatives, achievements and way forward amidst of Covid – 19 pandemic were highlighted by Prof Prashanta Banerjee from Bangladesh Institute of Bank Management (BIBM) in a talk jointly organised by South Asian Studies Centre, Impact Policy and Research Institute (IMPRI) and Counterview and centre for development communication & studies (CDECS).

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Starting with Prof Banerjee underlines that immediately after independence, Bangladesh focussed on financial inclusions through expansion of public sector banks and undertaking agriculture as well as micro and small enterprise credit programs, and at the same time the micro finance institutions pioneered by the Grameen Bank have made considerable efforts to reach poor with finance using peer monitoring and group based approaches. Recently, National Financial Inclusion Strategy (NFIS) has been documented by the Bangladesh government to develop a common vision and range of financial products.

“Access to finance at affordable cost, availability and uses need to be ensured for financial inclusion to happen” say Prof Banerjee.

Prof Banerjee links Financial Inclusion and Paul Samuelson Public Goods theory pointing that firstly  Public Goods theory suggest that everyone will benefit from financial inclusions regardless of status, income level or demographic differences which means both rich and poor, financially included and financially excluded citizens will enjoy the benefits of financial inclusions. Secondly, as a public good achieving financial inclusion would require public funding rather than private funding. Thirdly, as public goods, it gives the government an opportunity to take responsibility for promoting financial inclusion and finally the public goods theory of financial inclusion does not recognize private sector agents as promoters of financial inclusions.

Prof Banerjee explicates his point further sharing World Bank Global Index Database which analyses individual characteristics on a global scale which finds that the probability of owning an account at a formal financial institution and likelihood of saving formally is higher for richer, more educated, older, urban, employed, married or separated individuals and the probability of borrowing formally increases for older, educated, richer and married men. On the other hand Allen et. Al (2016) provide evidence of country characteristics influencing financial inclusions. Quality institutions, efficient legal rules, strong contract enforcement and political stability improve and strengthen financial inclusions. Moreover, Characteristics about the banking sector plays a key role as high cost of opening and using bank accounts, high distance and disclosure requirements reduce formal inclusions. Trust in banking sectors, existence of deposit insurance and tax incentive schemes also adds to financial inclusions.

Bangladesh Financial inclusion for Individuals, Firms and Farms: Policy, Reforms and product design.

Putting forth Bangladesh important initiatives for financial inclusions for individuals Prof Banerjee explains Bangladesh’s three important initiatives in areas of policy, reforms and product design. Policy initiatives includes opening of no frill accounts which require a nominal opening balance, bank account for farmers, freedom fighters, beneficiaries under Social Safety Net and garment workers where they can open a bank account by depositing BDT 10 at any state owned commercial and specialised banks. To illustrate how policy has helped in financial inclusions Prof Banerjee shares a quarterly report on financial inclusions in Bangladesh indicating that compound annual growth rate of No frill accounts, school banking, Agent banking, internet banking, mobile financial services, debit and credit card services has been reported as 7 %, 69.6%, 225.1%, 27.7%, 114.1%, 18.8%, 16.6% respectively from year 2014-2019 which is an remarkable growth and a way to ensure financial inclusion for an individual. Prof Banerjee shares financial inclusions for Firms and Farms with an example of quarterly statement of SME loan disbursement. He pointed that the Compound annual growth rate from year 2014 to 2019 in SME financing, male entrepreneurs and female entrepreneurs has been reported as 25.3%, 10.3%, and 16.5 % respectively. Further agricultural financing to total financing by bank for year 2019 is 4.4% which needs to be worked upon.

Financial inclusions Deeping: Driver and facts

Prof Banerjee says that Bangladesh has successfully deepen financial inclusions with an reference of statistics from scheduled bank showing that the share of urban based branch percentage has increased from 42.6% to 51.5% from year 2010 to 2019 while the rural based branch percentage has dropped from 57.4% to 48.5 % due to reasons of changing the definition of urban area and biased approach of private banks for rural areas, hence opening of rural branches to be looked upon. Further, he shares that fully online branch has grown to 88.4% in 2019, which is a positive aspect.  Elucidating point of financial inclusion Deeping Prof Banerjee draws down a financial Access survey stating that share of deposits is urban and rural area is 79.1% and 20.9% respectively which is a grey and needs to be worked upon by encouraging people in rural areas to keep money in banks. However on the brighter side the compound annual growth rate of  the male and female participation in ‘household deposits has increased to 19%, 22.9% respectively  and for household loans’ it  has increased to 24.2% and 20.2% respectively from year 2014 to 2019. On the contrary Loans and advances indicate higher loans takers in year 2019 are urban with 89.7% while rural percentage is 10.3% and needs to be taken into consideration.

Prof Banerjee through financial Access survey database of the IMF shows Position of Bangladesh as compared to India, Thailand and Japan in 2018, and points out that Bangladesh stands ahead in number of mobile money transactions compared to India, Thailand and japan and has done a remarkable work in it.

Prof Banerjee puts forth a questionnaire survey about growth pattern of SME financing during 2014-2019 and states that 86.6% people think geographical penetration through branch and agent banking and regulatory support through Re/Pre finance are the major factors for steadily increasing growth patterns while 6.7% people anticipate change in environment, high employee turnover main  factors of steadily decreasing pattern ,on the other hand for uneven or no definite growth patterns unfavourable movement in NPL is the main cause.

Based on a questionnaire survey Prof Banerjee underlines that policies of refinancing schemes, circulars for promoting agro based industries and definition of CMSME, reforms of presence of grace period, MFI linked agri financing policy, agent banking channel based account opening, Mobile financing services among new product design are the most effective initiatives for promoting  CMSME and agriculture farming.

Prof Banerjee also puts forward  that Risk of fund diversion to family matters, social stigma and glass ceiling, more focus on trading business than manufacturing by women entrepreneurs, difficulties in managing family line and professional life are major reasons for lower than expected growth in the number and amount of women entrepreneur’s loans .

Barriers of financial inclusions and way-out

Difficulties for the unbanked people in meeting formalities, Lending CAP on SMEs, Lack of financial literacy, Priority on city based banking distribution channels, mismatch between cost of operation and rate of return, lack of collator and guarantor, informal nature of business with more cash based transactions, low profit margin in SME financing are some of the major barriers stated by Prof Banerjee. He also suggested some way outs for the barriers like more simplified process in providing credit, establishment of branch, sub branch, agent booking outlets in rural areas, initiation of easy investment products, arranging training for entrepreneurs using public – private partnership, adapting technology in borrower selection process, increasing collateral free lending limits for SMEs, withdrawal of interest rate caps, better assessment of value chain in making financial decisions.

Suggestions and Way forward

Some suggestions in Covid-19 situation put forth by Prof Banerjee are encouragement of Fintech based financial inclusion, increased use of No Fill Accounts (NFAs) and school banking account, adoption of innovative technology driven financial services, encouraging banks to offer non-financial services against a renewable fees, reconsideration of current definition of urban area, rewarding banks with innovative financial inclusion, Simplification of credit guarantee schemes for small, cottage and micro enterprises by relaxing the conditions of rescheduling and taking litigation measures and undertaking study to dig deeper  into reasons behind the gender gap in financial inclusion.

“If people cannot come to the bank, bank has to go to the people and with this motive grameen banks were established” says Prof Utpal.

In response to the issue of people not using loans for productive purposes , arising survival issues of finance intuitions and its impact on Bank as well as economy, Prof Banerjee said that though it is true but our main focus are the people who can use their funds for productive use. Hence in Bangladesh banks try to find out right borrower with right mind set and right capacity. Stating about foreign banks Prof Banerjee shared that although Foreign banks haven’t done much for financial inclusions but stillwe have requirements for foreign banks as they help us in foreign trade , give us a learning platform being a world standard.

Prof Banerjee emphasised that institutional financial inclusion is another key to reduce the poverty as this lead to further employment and empowerment. Dr Arjun Kumar from IMPRI gave the example and role of Pradhan Mantri Jan Dhan Yojana, which is a financial inclusion program of the Government of India that enable Indian citizens to open bank account. This ensures the expansion of affordable access to financial services such as bank accounts, remittances, credit, insurance and pensions. The issue of dormant account was also pointed out as the both India and Bangladesh have similar challenges. 

Dr Simi Mehta asked about digital Bangladesh mission and state of women users in this digital outreach programme for mobile financial services. 

According to the government, Digital Bangladesh implies the broad use of computers, and embodies the modern philosophy of effective and useful use of technology in terms of implementing the promises in education, health, job placement and poverty reduction. The philosophy of ‘Digital Bangladesh’ in-principle comprises ensuring people’s democracy and human rights, transparency, accountability, establishing justice and ensuring delivery of government services to the citizens of Bangladesh through maximum use of technology, with the ultimate goal being the overall improvement of the daily lifestyle of general people. This includes all classes of people and does not discriminate people in terms of technology. Prof Banerjee shared that the female participation is partially challenged by the social structure. However the sector where women are employed such as garments production which is an enabler for financial inclusion among the women.

In an effort to support the cottage, micro, and small enterprises (CMSEs) mired in financial difficulty caused by Covid-19, Bangladesh Bank approved a credit guarantee scheme (CGS). Under this package, any entrepreneur of the cottage, micro, and small enterprises (CMS) category can avail a collateral-free loan between Tk 200,000 and Tk 5,000,000 as working capital under the Credit Guarantee Scheme of Bangladesh Bank. Following the implementation of the scheme, CMSEs which fail to meet the collateral requirements of the banks or other FIs can be provided with support from the CGS. Although late, it has responded to the long-standing market demand for such a scheme providing third-party credit risk mitigation to CMSE lending institutions. However, Prof Banerjee pointed out that the credit guarantee scheme (CGS) is not enough due to various implementation level challenges. 

Acknowledgements: Nishi Verma is research programs assistant at Impact and Policy Research Institute (IMPRI), New Delhi

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Featured Image Courtesy: Bruce Wallace